Whenever I start a meeting with a client, one of the first topics I bring up is “How is your cash flow month to month?” If a client is finding it difficult to juggle all of their financial commitments, I’ll sit with them and prepare a high level budget. This helps me to look for issues and recommend solutions. For many folks, they’d rather watch paint dry than sit down and do a family budget. However, (much like a tooth ache) if you ignore it for too long, fixing it could end up costing you more time and money than if you had just addressed it when the first sign of pain arrived.
When I speak with small business owners, cash flow is frequently a source of frustration. Vendors want to be paid yesterday and clients want to pay tomorrow. Inevitably surprises will come, and the coffers may be empty. Here are some tips that can help manage the process:
Prioritize your bills
Not every bill must be paid immediately. Knowing who needs to be paid and when will help you manage your cash flow. Obviously payroll, rent, utility and taxes all must be paid immediately or your business could suffer major ramifications. However, all other major bills should be reviewed for payment structure and potential discounts. Suppliers and other vendors will often allow flexibility. Don’t be afraid to negotiate and leverage deals and view your key vendors as partners who can help your business succeed.
Create a rainy day fund
Just as we should have an emergency reserve fund for our personal lives, businesses should also work on building up a cash reserve. Unexpected expenses are an obvious reason to build a rainy day fund, but the unexpected opportunity is just as important. A few friends of mine are in construction, and I can’t tell you how many times they were able to scoop up a used piece of equipment from a motivated seller because they had cash on hand. However, keep the reserve reasonable. In today’s low interest or non-existent interest rate environment, having too much cash means it’s not working to grow your business and should be used elsewhere.
Create a cash flow forecasting template
Mastering basic cash flow procedures can increase the viability and profitability of your business. The key is to create a repeatable and structured process. There are many great tools online now that will help you start and manage both your cash flow reports and forecasts. Take a minute to Google “small business cash flow template” and download a few different versions until you find one that fits your needs and your business. These templates will help you map where you are today and your expectations for your business typically over a 12 month period. Think of this as preventative medicine. You are putting the time into doing this so you can identify potential issues and create a game plan now on how best to handle them.
Know when to hire a professional
To keep costs down many small business owners start out doing their own bookkeeping, payroll and accounting themselves. The key is to know when to relinquish control and hire a professional. Ask yourself if the time, energy and stress you feel handling tasks like payroll checks, managing employees benefits and reconciling bank statements is really worth your time. Yes, these tasks need to be completed and it may seem cheaper to do it yourself, but they are taking time away from your schedule that could probably be best spent elsewhere. We’ve heard from many small business owners that it wasn’t until they hired a professional to handle some of these mundane tasks that they realized how poor a job they were doing. Know when to let tasks go, and what your true value is to your company. Sometimes keeping costs down may actually be costing you money.
Running a successful business is extremely hard work. Analyzing cash flow maybe the last thing you want to sit down and do but done properly and with a commitment the benefits can outweigh the costs. With the right approach, many business owners may find that it actually results in costs savings and reduces errors, which should lead to less stress and more time for you to focus on running your business.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.